Japan’s Debt & Pension Crisis Enters Final Stage

To follow up on Keynesianism’s Depredations and Futility in Action, there is more evidence that the train wreck that is the Japanese government is hitting a wall …

Bloomberg writes Japan Must Raise Sales Tax Above 10%, Kan Panel Member Says:

Japan needs to more than double its 5 percent consumption tax to shore up the government’s finances given soaring debt and welfare costs, a member of Prime Minister Naoto Kan’s tax and social security panel said.

“I don’t think an increase to 10 percent is enough,” former Financial Services Minister Hakuo Yanagisawa said yesterday in an interview at his office in Tokyo. “Our discussions must be based on new realities.”

Kan appointed the 75-year-old Yanagisawa to the panel that will meet for the first time on Feb. 5. Yanagisawa, a former colleague of Economy Minister Kaoru Yosano, who is leading Kan’s push for a debate on the sales tax and has advocated doubling the levy. The government is set to issue a plan on shoring up Japan’s social welfare system by June.

Concern over Japan’s rising debt, the largest in the developed world, prompted Standard & Poor’s to cut the country’s credit rating last week. Social security costs in Japan, the world’s most rapidly aging society, have risen more than 60 percent since 2000 and will account for 53 percent of government spending in the fiscal year beginning in April.

Again: In my opinion, if you’re looking for a prediction of economic developments in the US, look to Japan. I think it’s possible that things will happen a bit faster here, but Japan shows us how much the system can be stretched before it has to fold.

Japan’s debt crisis is now approaching its endgame fast. But With all the turmoil going on in the Middle East and in Europe, few people seem to be paying attention …


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1 thought on “Japan’s Debt & Pension Crisis Enters Final Stage”

  1. That is an AMAZING statistic – social security costs are 53% of government’s expenditure. It shows just how hard it is to reform these programs – particularly as the country ages and older voters become more and more powerful.

    I think you are right that Japan is headed for some big time trouble, because what no one is paying attention to is how they finance their massive deficit.

    As you point out, JGBs represent 200% of GDP, by far the highest in the world. More amazingly, most of this has been accumulated during peacetime – in an effort to stimulate the economy back into growth, following the collapse of the asset bubble of the 1980s. Scarier yet, Japan’s overall economic expansion has been anemic, so one cannot expect future growth to drive higher taxes and lower expenditure (after all, people aren’t getting younger, certainly not in Japan).

    But the real kicker is that Japan will soon have to seek external financing. This will likely kill them. Japan has been able to rack up a debt of this size because they have had access to immense amounts of internal financing – that is, Japanese savers have been willing to accept the microscopic nominal returns. But now, Japan is aging to the point where net annual saving of the Japanese will no longler be adequate to fund the government borrowing, which means they will have to turn to outsiders.

    It is not clear how long they can go before external creditors are unwilling to hold JGBs. Different countries have different levels. The US has about 40% and seems to be in no imminent danger. Russia, by contrast, ran out of credit at 11% – and provoked the Asian crisis of 1998.

    Given a rational fear of default and/or devaluation, one has to assume that foreign investors will demand significantly higher interest rates, which will compound the problem.

    This is why they are trying to increase the sales tax – to reduce the deficit to a level that can be financed by Japanese savers. The problem is, this amount will likely continue to decline, while deficits are projected to grow. Soooo…we shall see.

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